PDF Solutions, Inc. — Q2 2018 Form 10-Q
Business and reporting period. PDF Solutions provides yield-improvement services, software and related solutions to semiconductor companies. This unaudited report covers the quarter and six months ended June 30, 2018; financial statement amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $21.1 million | $24.3 million | $45.9 million | $48.6 million |
| Gross profit / margin | $10.2 million / 48% | $12.9 million / 53% | $23.5 million / 51% | $25.8 million / 53% |
| Operating loss | $2.9 million | $0.7 million | $3.4 million | $1.1 million |
| Net income (loss) | $(2.1) million | $0.2 million | $(2.5) million | $0.7 million |
| Diluted EPS | $(0.07) | $0.01 | $(0.08) | $0.02 |
Q2 operating expenses were $13.1 million, including $7.1 million of R&D and $5.9 million of SG&A. For the six months, operating cash flow was $9.7 million, versus $1.0 million in 2017; investing cash use was $4.8 million, mainly capital expenditures, and financing cash use was $5.2 million, principally share repurchases and tax withholding on equity awards. Cash and cash equivalents were $100.9 million at June 30, down $0.4 million from year-end. Working capital was $143.7 million. The filing reports no debt or undisclosed borrowings.
Changes and management commentary
- Q2 revenue fell 13% year over year. Design-to-silicon-yield solutions revenue declined 7%, mainly from fewer hours worked across contracts, partly offset by Exensio growth. Gainshare revenue fell 25%, primarily because a prior-year one-time performance bonus did not recur.
- Six-month revenue declined 6%; design-to-silicon-yield solutions revenue decreased 8%, while Gainshare revenue was essentially unchanged. Management attributed the core-solutions decrease to lower hours worked across multiple contracts and customers.
- Management cited continued semiconductor investment in leading-edge and derivative process nodes, China industry investment, and new technologies as potential business opportunities. No company-specific revenue or earnings guidance is provided.
- PDF Solutions adopted ASC 606 in January 2018. Adoption reduced opening accumulated deficit by $4.4 million and changed the timing of certain revenue and commission-cost recognition; the reported effect on first-half 2018 revenue and net income was not significant. Gainshare revenue is now estimated and recorded in the period of customer usage, with later true-ups possible.
- At June 30, remaining performance obligations were approximately $45.3 million; most are expected to be recognized over the following two years, subject to stated exclusions and possible contract changes.
Liquidity, risks and contingencies
- Management expects existing cash resources and anticipated operating cash flows to cover operating needs, capital expenditures and other obligations for the next 12 months.
- Customer concentration is significant: Customer A represented 40% of Q2 revenue and 43% of gross receivables; Customer B represented 10% of Q2 revenue and 18% of gross receivables. Gainshare depends on customer production, sustained yield improvements and other factors outside the company’s control.
- Contractual obligations included $13.7 million of purchase commitments, primarily due within 12 months, and $10.0 million of future operating lease payments. A new Santa Clara lease has an approximately ten-year term and approximately $7.0 million of stated obligation before an allowance.
- Unrecognized tax benefits were $13.0 million, excluding interest and penalties; $2.9 million, including interest and penalties, was recorded as long-term taxes payable. Management’s tax accounting remained subject to evaluation following the Tax Cuts and Jobs Act.
- Foreign exchange movements affected other income and expense. One forward contract had an $8.1 million notional amount; the filing estimates that a 10% exchange-rate movement could change its fair value by approximately $0.8 million.
- The company reported no material legal proceedings or accrued litigation loss. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower service hours persist and Exensio growth can offset weakness in yield-ramp work.
- How Gainshare estimates and subsequent true-ups affect revenue, given customer concentration and the prior-year bonus comparison.
- Cash generation and capital spending, including DFI-related investment, against repurchases under the new $25 million, two-year authorization.
- Realizability of deferred tax assets, the valuation allowance, and resolution of uncertain tax positions.
- Timing and conversion of the $45.3 million remaining performance obligations into recognized revenue and cash collections.